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Preventing the Most Common Form of Cancer (DUSA)

Right now, about 58 million Americans suffer from the most common form of skin pre-cancer - Actinic Kerotosis (AK). I say pre-cancer because with the right treatment, this relatively common skin condition can be prevented. But, if not treated properly there is a possibility that the condition could get a lot worse - it could even become life threatening. It is not my place to give you advice on which medical treatments you should choose for particular illnesses and conditions - I am not a doctor. However, I do specialize in finding opportunities to invest in small cap growth companies that have the opportunity to make significant returns. I have found a tiny $110 million market cap biotech company that is helping to treat this condition, while providing significant growth potential for investors. It specializes in skin-based products. Its main product, Levulan Kerastick treats the common precancerous skin condition Actinic Kerotosis (AK) which are lesions caused by sun exposure. Last year over eight million people were treated for AK, up 52.5 percent from 2005. The company is DUSA Pharmaceuticals (NasdaqGM:DUSA - News) and it is one the best growth stories I know of in the small cap biotech space. The company turned in its first profitable year during 2010 and has the potential to make generate significant returns in 2011.

Levulan is really the company's only product - it alone accounted for $10.2 million of the $11 million in revenue the company reported in the last quarter. Gross margins for the product also reached a record high at 89 percent. But currently, the product only makes up 5 percent of the market share for AK treatment, meaning there is still tremendous market growth potential. And it is quickly eating away at the competition due to the minimally invasive nature of the product. Unlike its competitor's products, DUSA won't keep its customers from going to the beach while being treated with Levulan. Its competitors treat AK with topical creams, dermabrasion, chemical peels, laser removal, or cryotherapy (freezing with liquid nitrogen).

Unfortunately, topical creams, dermabrasion and chemical peels have a history of leaving scars or splotches while methods such as freezing with liquid nitrogen are oftentimes not covered by insurers. DUSA's product is far superior. It does not leave scars, is covered by insurers and can be treated with one visit to the dermatologist.

Dermatologists are taking notice. Investors are sure to follow. And sales are rapidly increasing. With revenues surging by 25.6 percent in 2010, Levulan is clearly generating a loyal following. Gross margins have steadily increased over the past five years with the latest gross margin hitting 80 percent in 2010. Gross margin is expected to increase above 81 percent in 2011. And with DUSA's leading product eating away at market share I would expect to see the 25 percent growth rate continue for a few more years. Like most small cap biotech companies DUSA is highly dependent on one product - a potential weakness. However, its rapid growth rate should lead to significant gains through share price appreciation. As I write this, the stock is up approximately 25 percent. DUSA reported revenue growth of 27 percent in the first quarter of 2011, compared with the same quarter last year. It did experience a net loss on a GAAP basis of 0.02 per share for the first quarter. The loss can be attributed to the fair value accounting of the warrants that were issued in 2007. This adjustment does not concern me so much since it is a paper transaction only, and it obviously does not concern the market with the share price advancing 25 percent after the earnings report was released.

With an annual sales growth rate of approximately 25 percent and a forward P/E of 22.8 I would be a buyer up to the $6.50 to $6.75 level. The stock currently trades for $5.71 so you have around 13.8 percent upside from here before the stock looks too stretched to start a position. If the current growth trend continues, as I believe it will, I could easily see the share price reach $8.50 to $10 by the end of the year.